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Tweaks to the I-T Act will do the trick

24 Feb 2016

Are you listening, Mr Jaitley? The salaried class needs a break and our tax laws need to keep up with the times

The Budget season has ushered a climate of contradictions. Along with policy impetuses on ‘Make in India’, ‘Startup India and so on, there are statements of intent to rationalise tax laws by balancing the tax rate to 25 per cent with the removal of tax exemptions.

Tax breaks are prime motivators to encourage initiatives given our dismal track record in focussing on ease of doing business. Any rationalising measures of the tax regime will be one-sided if ease of doing business is not addressed upfront. That said, Budget day has one constant — amendments to the Income-tax Act 1961 that keep everyone guessing and invariably raise more questions than answers.

The tweaks in the Act are perhaps already baking in the oven for the party on February 29. Here are five that are hopefully part of the recipe.

ICDS and effective management

1. Income Computation and Disclosure Standards (ICDS) that form part of the Act need to be kept in abeyance as suggested by the Easwar Committee’s draft recommendations. CFOs in the country today are grappling with change management to a degree not experienced in the past, thanks to the Companies Act 2013. ICDS is currently a vestigial organ.

Our tax system is non-integrated: accounting standards do not form the basis for computing income for tax purposes.

Policy vision dictates that tax law integrate with financial accounting as is the case in several developed economies. To come up with a hybrid accounting standard only for tax that, again, is subject to interpretations, is unnecessary.

Still, Given the tectonic changes that CFO’s are having to grapple with around managing IND-AS, IFC and impending GST, a postponement or even removal of ICDS merits consideration.

2. The introduction of ‘Place of Effective Management’ as a criterion to determine the residential status of foreign companies is not unknown. However, the manner in which it was inserted effective April 1, 2015, is suspect and reveals short sightedness.

At a time when India is just maturing with outbound investment and consolidation of business and economic strength in the global marketplace, these amendments dampen initiatives and divert focus. The draft guidelines were circulated close to three months before the close of the year and raised more questions than answers. Tweaks to the Act now will admittedly be tricky, since reverting to the old provisions of control and management wholly in India will prick the ego of the government.

3. Startup India also implies ‘Stay in India’ where private equity funds as well as their portfolio investments must enjoy a level playing field in all spheres. The current provisions of the Act discriminate between listed and unlisted shares in terms of treatment of capital gains on exit. Currently, long-term capital gains tax is pegged at 10 per cent for listed securities. The argument is that listed shares do not get the benefit of indexation.

The point again is around keeping a policy consistent, equitable and easy. Ensuring parity between unlisted and listed securities is imperative to provide a level playing field.

Tax breaks and inflation

4. Should tax breaks stay or go? The offer of a 3-year tax holiday in the startup policy is both infructuous and contradictory. It is infructuous because,typically, a startup would not see profits in three years to avail exemptions. And the government’s flip-flop makes it contradictory.

Besides ‘Startup India’, the ‘Make in India’ requires a revival of policy and initiatives such as Special Economic Zones and Integrated Manufacturing Zones.

Tax breaks continue to be integral to making initiatives a success. Removing the Minimum Alternate Tax (MAT) is therefore a necessary tweak. Revenue has come at the cost of industry and business through levying MAT on SEZs, for example. Now it is time to withdraw MAT to give impetus to new businesses, particularly in the manufacturing sector. This can be achieved by opening a short- to medium-term window, say for five years, within which units should be encouraged to set up without the burden of MAT.

5. Finally, coping with inflation. The cost of living in urban India has become very burdensome, especially to ordinary salary-earners. GST is certainly not going to keep inflation in check.

It is time salary-earners are provided a robust standard deduction as well as an increase in all perquisite and allowance limits. Some allowances still exist at prehistoric limits.

Children’s education at ₹100 a month/child or a conveyance allowance of ₹800 are unfathomable. Salary-earners are practically taxed at gross levels; that now requires correction to motivate salaried individuals. Necessary amendments to the Act and Rules will provide substantial relief.

This article was published in the Hindu Business Line, to read please click here.